ABF Expecting Good Growth

Recent investments, higher working capital and higher interest rates have increased the group’s net financing costs. However, this impact will be largely offset by the lower underlying tax rate of 25% compared with 27% in the first half last year.

25/02/08 Associated British Foods plc has issued a trading update prior to entering the close period for its interim results to 1 March 2008, which are scheduled to be announced on 22 April 2008.

“In our interim management statement issued on 17 January 2008 we reported that trading in the first 16 weeks had been fully up to our expectations. This trend has continued and our interim results will show good growth in the group’s adjusted operating profit over the same period last year. Strong growth in Agriculture, Grocery and Primark more than offset the expected, and previously reported, decline in Sugar,” the company reported.

The income statement will include an exceptional gain of £16m following ABF’s decision to renounce permanently sugar quota in the UK and Poland. This comprises the compensation receivable from the EU restructuring fund less both the write-off of the unamortised cost of quota purchased in 2006 and costs relating to the closure of the York and Ostrowite factories.

During the half year, the company will have spent some £120m on acquisitions, primarily on certain of the European assets of Gilde Bakery Ingredients for AB Mauri and on the beet sugar factories in north east China. At the half year the group’s net debt will reflect these investments, the higher working capital in Sugar expected at this time of year and higher working capital elsewhere resulting from the effect of substantially higher commodity prices on stocks.

Sugar profit in the UK and Poland will be much lower than last year mainly as a result of the further effects of the EU sugar regime changes. The restructuring levy per tonne has been increased from €126 last year to €173 this year and the temporary reduction of quota increased from 152,000 tonnes to 191,000 tonnes. In the UK, profit was also impacted by higher energy costs and a smaller crop of 1.05 million tonnes which was affected by heavy mid-summer rains. Poland had an exceptionally good campaign with total production estimated at 227,000 tonnes and Glinojeck again set new operating records. The recent strengthening of the euro has benefited both businesses.

The European Commission has announced that a total of 2.6 million tonnes of sugar quota has been permanently renounced across the EU in the first phase of its enhanced restructuring scheme. This brings the total quota for sugar, inulin and isoglucose renounced to date to 4.8 million tonnes which is a substantial move towards the target set by the Commission. The second, and final, phase renunciation is expected to be announced at the end of March. As part of the first phase British Sugar has received confirmation that its application to renounce permanently 191,000 tonnes of UK and Polish sugar quota from October 2008 has been accepted. The financial consequences will be shown as an exceptional net gain of £16m. As anticipated there will be relief from the restructuring levy on the renounced quota in the 2007/8 marketing year amounting to £25m.

At Illovo, profits will be lower than the same period last year. Sugar production was impacted by very high rainfall making it impossible to harvest all available cane at the end of the season. Volumes in both South Africa and Zambia are lower than previously forecast although the total sugar production estimate of 1.8 million tonnes is still above the previous year. Operating performance was positive with good plant availability and sugar extraction in most areas. The capacity expansion in Zambia is progressing well.

The recent frosts in southern China will affect sugar production from our cane sugar business although the consequently firmer prices will have some mitigating effect on profit. Construction of a new cane sugar mill in Jianchenjiang with a capacity of 120,000 tonnes will be completed at the end of this year and will enable further growth. Eleven beet sugar factories have now been acquired in north east China and the campaign is progressing well with production of some 240,000 tonnes of sugar expected, the company said.

Agriculture performed extremely well with revenue up and profit sharply ahead of last year. Strong trading in the markets for cereals, nitrogen based fertilisers and other crop inputs led to an excellent result from Frontier. Further investment enabled KW Trident to benefit from high demand for sugar beet feed and co-products from the cereal, distilling and brewing sectors. However, in China, recovery of the dramatic increase in the cost of raw materials and energy has proved challenging.

Grocery profits will be much higher than the same period last year, primarily as a result of a substantial improvement by Allied Bakeries but also due to strong performances from Twinings Ovaltine and George Weston Foods in Australia. The UK bakery business benefited from the continued improvement in operational performance, higher volumes and achievement of price increases that recovered the higher wheat costs. In Australia, the results also reflect improvements in bakery performance and successful recovery of higher wheat costs. Twinings Ovaltine again delivered strong sales growth, particularly from tea in the UK and US and from Ovaltine in Asia and developing export markets.

As expected profit at ACH has been impacted by sharp increases, to unprecedented levels, in the cost of corn, soy bean and canola oils. Price increases have now been achieved with further initiatives planned. The combination of Patak’s and Blue Dragon is on plan, trading is encouraging and the new Blue Dragon factory in Poland is being commissioned. Grocery profit will include a charge for the closure of the existing factories in Wales. Westmill profit will be ahead of last year.

In February we agreed to acquire, subject to clearance by the regulatory authorities, KR Castlemaine, a manufacturer and marketer of meat products in Australia. The addition of the KR brand and the modern, low-cost factory at Castlemaine will strengthen its existing meat business.

Ingredients will achieve good sales growth but some higher input costs, specifically in our protein business, will adversely impact margin. Growth in enzymes has been achieved by a combination of increased sales resource with a wider geographical reach and the introduction of new products. In yeast, the Brazilian business benefited from lower operating and molasses costs and the expansion of the Argentinean plant has created one of the lowest cost plants in the world. Increased demand has led to further investment in additional yeast and yeast extract capacity in north east China and enzyme capacity in Finland. ABF sold its small UK-based emulsifier business at the beginning of February with completion subject to competition clearance.